Disclaimer: This article is intended as an informative piece. This is not accounting or tax advice. Please speak to a qualified tax professional about your specific circumstances before acting upon any of the information in this article.
The allowable costs are deducted from the disposal proceeds, to calculate the gain or loss on each and every disposal made in the tax year.
When calculating the cost of acquisition for capital gains tax (CGT) on cryptoassets, individuals must follow HMRC’s guidance regarding “Pooling”. HMRC describes the concept of pooling as “Instead of tracking the gain or loss for each transaction individually, each type of cryptoasset is kept in a ‘pool’. The consideration (in pounds sterling) originally paid for the tokens goes into the pool to create the ‘pooled allowable cost’”.
To find the allowable cost (also known as the base cost) for the CGT computation, the first step is to identify which cryptoassets which have been sold. The ‘matching rules’ as set out below determine the order in which cryptoassets are deemed to have been sold. On the disposal of cryptoassets, they are first matched with acquisitions:
- 1. made on the same day (same day rule), then
- 2. made in the next 30 days on a first-in first-out basis (bed and breakfasting rule), then
- 3. the rest of the acquisitions are aggregated in the S104 pool (pooling rule)
Once the deadlines for same day and next 30 days acquisitions have passed, these cryptoassets are also added to the S104 pool.
There is a S104 pool for each type of cryptoasset held. The pool is an aggregate of all the acquisitions which are not sold within the subsequent 30 days. Therefore, an average cost for the cryptoassets in the pool is maintained and a pro-rata cost is deducted from disposals using the matching rules.
In addition to the acquisition cost of the cryptoasset being an allowable cost to deduct in the capital gains calculation, there are also incidental costs of purchase and disposal that can be deducted.
HMRC states that incidental allowable costs include:
- transaction fees paid before the transaction is added to a blockchain
- advertising for a purchaser or a vendor
- professional costs to draw up a contract for the acquisition or disposal of the cryptoassets
- costs of making a valuation or apportionment to be able to calculate gains or losses
For each cryptocurrency trade, you should calculate your total allowable costs and deduct them from the disposal proceeds. This will be your taxable gain or loss from the trade. If you have realised more losses than gains in a year, you can register these losses with HMRC and use them to offset gains in future years.
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